Cryptocurrencies Pose Significant Risks to Financial Stability, Says Reserve Bank of India
In its recent Financial Stability Report for 2024, the Reserve Bank of India (RBI) reiterated its concerns about the risks associated with cryptocurrencies, including stablecoins.
The RBI has consistently maintained its anti-crypto stance, warning that the unchecked use of digital assets could have detrimental effects on financial stability. The central bank highlighted the potential risks of digital assets, including stablecoins, which could weaken monetary control, facilitate capital flight, and divert resources away from the real economy.
While the crypto market in India is still relatively small, the RBI cautioned that the convergence of decentralized finance with traditional finance could pose systemic risks. Stablecoins, in particular, were singled out for their potential to create run risks and disrupt economic stability.
According to the RBI, stablecoin issuers are increasingly holding mainstream financial assets, such as government securities, raising concerns about their impact on economic stability. The use of stablecoins in emerging markets like India has raised alarms due to their potential to circumvent capital controls, strain fiscal resources, and threaten financial stability.
India’s central bank has been advocating for central bank digital currencies (CBDCs) as a safer alternative to stablecoins. Governor Shaktikanta Das has criticized stablecoins as “private money” that could undermine government sovereignty by allowing private issuers to dominate the payments market.
Tokenization is another area of concern for the RBI, as it could deepen the interconnectedness between traditional and decentralized financial systems. The potential risks of tokenization include liquidity and maturity mismatches, excessive borrowing against tokenized assets, asset price volatility, and operational vulnerabilities that could spill over into the broader financial system.
Despite calls for regulatory clarity in India’s cryptocurrency sector, the government has yet to introduce a comprehensive regulatory framework for virtual assets. The existing tax regime, which includes a 30% capital gains tax and a 1% TDS on transactions, has been criticized for driving capital flight and causing revenue losses for both the government and domestic crypto service providers.
As the regulatory landscape for cryptocurrencies remains uncertain in India, the RBI’s warnings about the potential risks of digital assets underscore the need for a clear and comprehensive regulatory framework to safeguard financial stability.
Source: Crypto News